CASH FLOW STATEMENT

Different activities of a cash flow statement:

1. Operating Activities
2. Investment Activities
3. Financing Activities
 I. Operating Activities:
• Inflows
• Sales of goods
• Revenue from services
• Outflows
• Payment for purchase of inventories
• Payment for operating expenses
• Payment for taxes
 II. Investing Activities

• Inflows
• Sales of long-lived assets such as property,
plant, and equipment
• Sales of debt or equity securities of other
entities
• Returns from loans (principal) to others
• Outflows
• Acquisitions of long-lived assets
• Purchase of debt or equity securities of other
entities
• Loans ( principal) to others
 III. Financing Activities

• Inflows
• Proceeds from borrowing
• Proceeds from issuing the firm’s own
equity securities
• Outflows
• Repayment of debt principal
• Repurchase of a firm’s own shares
• Payment of dividends
 PREPARING A STATEMENT OF
CASH FLOWS
• The statement of cash flow describes the
cash flows from three different activities i.e.,
operating activities, investment activities and
financing activities.
• Two methods are used for calculating and
presenting cash flow from operating
activities:
• The direct method and the indirect method
 CASH FLOW FROM OPERATING ACTIVITIES:

• Direct Method
• Cash collected from customers (+)
• Cash paid to suppliers ( -)
• Cash paid to employees ( -)
• Cash paid for other operating expenses ( -)
• Cash paid for taxes ( -)
• The final balance is the net cash flow from
operating activities.
• Indirect Method.
• Net Profit (loss)
• Non-cash / non operating revenue and expenses included in profit (loss)
• + Depreciation
• + Loss on sale of assets
• + interest paid
• - Profit on sale of assets
• - interest received
• - dividend received
• Cash provided (used) by current assets and liabilities:
• + Decrease in current assets
• + Increase in current liabilities
• - Increases in current assets
• - Decrease in current liabilities
• Balance is the net cash flow from operating activities.
Illustration I: Following is the P&L Account of a hypothetical company

for the year ending December 20X1 .

Rs Rs
To COGS: By Sales 15,000
Opening St 3000
+ Purchase(cash)
7000 5000 ________
Less, cl stock 5000 10,000
To Gross Profit ______
15,000 15,000
6,000 By Gross Profit
To Salary 4,000 10,000
To Net Profit ______ ____
10,000 10,000
Illustration I: Following is the P&L Account of a hypothetical company

for the year ending December 20X1 .

• Sales Rs 15,000
• Less, COGS Rs 5,000
• Less, Salary Rs 6,000

• Profit Rs 4000
 Balance Sheet for the years ending 31st December 200X and 20X1

200X 20X1 200X 20X1

Share Capital 10,000 12,000 Cash 5,000 3,000

Reserve & surplus 3,000 7,000 S. Debtors 5,000 1,000
S. Creditors 10,000 5,000 Closing Stock 3,000 5,000
Machinery 10,000 15,000
_____ _____ _____ ______
23,000 24,000 23,000 24,000
 CASH FLOW STATEMENT:

• I. Cash Flow From operating activities (CFO):

• Direct Method
• Cash flow from debtors (Rs.5,000 – 1,000) 4,000
• Cash Sales 15,000
• ______
• 19,000
• Less: Cash paid to creditors 5,000
• Purchase 7,000
• Salary 6,000
• _____
• 18,000
• ______
• Net Cash Flow from Operation 1,000
•
 Indirect Method:

• Operating profit 4,000

• Add: Cash provided by decrease in Working capital
• S. Debtors (decrease) 4,000
• ______
• 8,000
• Less: Cash used by increase in Working capital
• Increase in closing stock 2,000
• Decrease in S. Creditor 5,000
• _____
• 7,000
• _____
• Net cash flow from operation 1,000
• I. Cash Flow from Operating Activities (CFO) 1,000
• II. Cash Flow from Investing Activities (CFI) (-)5,000
• III. Cash Flow from Financing Activities (CFF) 2,000
• ______
• Net Cash Outflow (-)2,000
• Opening Cash Balance 5,000
• Less: Net Cash Outflows (-)2,000
• ______
• Closing Cash Balance 3,000
Illustration II. Income Statement for the year ending
December 2008

Rs Rs

To opening inventory 10,000 By sales 20,000

To purchase 10,000 By closing inventory 18,000
To Gross profit c/d 18,000
______ ______
38,000 38,000
______ ______
To salary 14,000 By gross profit b/d 18,000
To depreciation 2,000
To net profit 2,000
______ ______
18,000
18,000
 Illustration II. Income Statement for the year ending
December 20X1

• Sales Rs 20,000
• COGS Rs 2,000
• Salary Rs 14,000
• Depreciation Rs 2,000

• Profit Rs 2000
 Balance Sheet

200X 20X1 200X 20X1

Outstanding salary 1,000 500 Inventory 10,000 18,000

Debenture 5,000 2,000 Machinery 10,000 4,000
Sundry creditor 15,000 20,000 Sundry debtors 6,000 4,000
Share capital 10,000 18,000 Cash 5,000 10,500
Net profit 2,000 Furniture 6,000
______ _____ ______ ______
31,000 42,500 31,000 42,500
 I. Cash Flow from operation

• Direct method

• Cash received from debtors Rs 22,000

• ( Rs 6,000 + 20,000 – 4,000)
• Less: Cash paid to creditors 5,000
• (15,000 + 10,000 – 20,000)
•
• Salary paid
• for 1999 (Rs 1,000 – 500) 500
• for 2000 14,000 14,500 19,500
• ______ ______ _______
• Net cash flow from operating activities Rs 2,500
• Indirect Method

• Net profit 2,000

• Add: depreciation 2,000
• _______
• 4,000
• Add: decrease in sundry debtor 2,000
• Increase in creditors 5,000
• ______ 7,000
• _____
• 11,000
• Less: increase in inventory 8,000
• Decrease in C.L. 500
• ______ 8,500
• ______
• Net Cash Inflow From Operation 2,500
• II. Cash flow investment activities
• Sale of machinery + 4,000
• Purchase of furniture - 6,000
• ______ (-) 2,000
• III. Cash flow from financing activity
•
• Share capital raised + 8,000
• Redemption of debenture – 3,000
• ______ + 5,000
•
• I. Cash flow from operating activities + 2,500

• II. Cash flow from investment activities - 2,000

• III. Cash flow from financing activities +5,000

• ______
• Increase in cash Rs 5,500
 Importance of Cash Flow From Operation

• It is possible for a firm to be highly

profitable and not be able to pay dividends
or invest in new equipment.
• It is possible for a firm to be highly
profitable and not be able to service debt.
• It is also possible for a firm to be highly
profitable and go bankrupt. How ?
• The problem is cash. Consider the
following question;
• You are a banker evaluating a loan request from a
prospective customer. What is your primary concern
when making a decision regarding approval or denial
of the loan request?
• You are a wholesaler of goods and have been asked
to sell your products on credit to a potential buyer.
What is the major determining factor regarding
approval or denial of the credit sale?
• You are an investor in a firm and rely on the receipt of
regular cash dividends as part of your return on
investment. What must the firm generate in order to
pay dividends?
 Nocash Corporation
• Nocash Corporation had sales of Rs.1,00,000 in
its second year of operations, up from Rs.
50,000 in the first year. Expenses, including
taxes, amounted to Rs. 70,000 in year 2,
compared with Rs.40,000 in year 1. The
comparative income statements for the two
years indicate substantial growth, with year 2
earnings greatly improved over those reported in
year 1.
 COMPARATIVE INCOME STATEMENT FOR
THE YEAR 1 AND YEAR 2

Year 1 Year 2

Sales Rs. 50,000 Rs.1,00,000

Expenses 40,000 70,000
________ __________
Net Profit Rs. 10,000 Rs. 30,000
Detailed Income statement for the year 2

Rs Rs
To Opening inventory 10,000 By sales 1,00,000
To purchase 75,000 By closing inventory 25,000
To Gross profit 40,000
_______ ________
1,25,000 1,25,000
______ _______
To Expenses 10,000 By Gross profit 40,000
To Net Profit 30,000
_______ ________
40,000 40,000
 BALANCE SHEET AT DECEMBER 31,

Year 1 Year 2

Cash Rs. 2,000 Rs. 2,000

Sundry debtors 10,000 30,000
Inventories 10,000 25,000
________ ________
Total assets 22,000 57,000
________ ________
Sundry creditors 7,000 2,000
Bank loan 0 10,000
Equity 15,000 45,000
_________ _________
22,000 57,000
 Cash flow from operating activities
• Cash received from debtors
• Rs(10,000+1,00,000 – 30,000) = Rs80,000
• Less: cash paid to creditors
• (7000 + 75,000 -2,000) = 80,000
• Expenses 10,000
• _______ 90,000
• ________
• cash flow from operating activity - Rs10,000
•
• How did Nocash cover its Rs.10,000 cash shortfall? The year 2
balance sheet reveals that a loan was taken from bank in the
year 2 only. The borrowing has enabled the firm to continue to
operate, but unless the company can begin to generate cash
from operations, its problems will compound. The higher the
cost of borrowing, the more costly and difficult it will be for the
firm to continue to operate.
• The Fund Flow Statement of the firm given below would
provide insights regarding unfavourable situation it may face.